Cryptocurrency is considered property in most countries these days. If you are wondering how to reduce crypto taxes legally, then you are at the right place to learn more tax techniques to legally reduce your crypto tax. If you make profits at the end of the tax year by trading or investing in Crypto, then you need to file them and pay taxes. But, you can reduce crypto taxes legally by following the tips and tricks in this post.
Disclaimer : We are not tax professionals. We just highlight our learnings here and it may be consistent with your state and federal law. So, please consult a CPA or qualified tax consultant, before taking any decision.
Cryptocurrency tax policies are challenging to understand. We are giving you cryptocurrency tax guidelines by providing you the information to reduce your crypto tax legally. You have to do some cryptocurrency tax preparations by tracking your crypto trades and transactions by reliable tax software.
You can easily get the net gains or loss report with its tax report, which helps you maintain your crypto assets and alert you to invest them. Please go through the following methods, which may help you reduce the crypto tax legally.
Tax Deductible Capital Losses
You should know how to reduce the crypto tax legally while trading your crypto assets. When you are trading cryptocurrency, you must report your capital gains or losses on your tax return.
You should first know the cost basis of cryptocurrency, which includes the purchase price of cryptocurrency with other allied costs to determine your capital gain or loss. You should also know your selling element’s market value, such as the dollar’s current value if you plan to trade your cryptocurrency to determine tax deduction.
Changing cryptocurrency into dollars, trading cryptocurrency with each other, trading cryptocurrency to buy stocks or gold, and earning cryptocurrency demand tax return from you at the end of the year.
Some of the cryptocurrencies don’t require any tax, such as you can gift cryptocurrency to your family and friends. You can easily transfer cryptocurrency between wallets without any tax. Besides, you can buy cryptocurrency with USD without any tax, but you have to pay tax if you want to trade them. However, if you got capital loss rather than capital gain, then you can still reduce the crypto tax legally at the end of the year.
If you have enough crypto assets, you should invest them quickly after buying them. Ultimately, this will give you long-term capital gain and less tax deduction according to cryptocurrency tax laws. Crypto tax is not applied to retirement accounts, so there is no need to pay tax if you have one.
How To Reduce Crypto Taxes Legally?
You can donate your crypto assets to a charity, which reduces crypto tax legally because you don’t have to pay any crypto tax on the capital gains of donated crypto assets. Sell the crypto assets shortly after buying for long-term crypto gains, which also reduce crypto tax.
You can use a specific identification method that helps you to calculate your tax return and capital loss or gains by crypto trading tax calculator in any reliable crypto tax software.
In FIFO accounting, we are selling cryptocurrency in the same order when we buy the oldest cryptocurrency first. FIFO gives high capital gains in the trending market, where the initial cost is lower than the current price. FIFO also gives lower capital gains in the lower market, where the cost is higher than the current price.
LIFO accounting is the opposite of FIFO. We have to sell the most newly bought cryptocurrency first. LIFO provides lower capital gains in the trending market and higher capital gains in the lower market, where the production cost is low.
Tax Loss Harvesting
Investing in your cryptocurrency is the most secure and effective way to reduce the crypto tax legally. You can easily follow the cryptocurrency tax laws and maintain your long-term capital gains by shortly invest them in the stock market. Tax-loss harvesting is to sell your crypto assets in low value to counterbalance the capital gains tax return.
We can understand the scenario of tax-loss harvesting by using an example. Therefore, suppose a guy named Roy buys $1000 off Samsung items and $2000 of Sony items. After some time, the value of Samsung items rises to $2000. On the other hand, the value of Sony items drops to $1500. Then the guy thought to sell all $2000 worth of Samsung items.
Roy didn’t do tax loss harvesting but selling Samsung items gives $1000 of capital gains, and also, he has to pay tax for all $1000 of capital gain he gets from selling. If Roy does tax-loss harvesting by selling his dropping stock, he can acquire long-term capital gain with a low tax return.
Capital gains or losses are summed up to calculate the net gains or losses. Therefore, Roy’s net capital gain is $500 because he had paid the tax on selling $1000 Samsung stock. Tax-loss harvesting is a common strategy to apply for tax reduction. Mostly investors harvest their crypto assets to balance taxes on both crypto gains and income.
Crypto Tax Software Technology
Crypto tax software technology is used to reduce crypto tax legally, which helps calculate your crypto net gains or loss. Given the tax report, you can get by any reliable crypto tax software because the software contains a crypto tax reporting tool that gives you all the details of your crypto assets.
The below table will help you better understand different crypto tax soft wares features that help you choose reliable crypto tax software.
|Block Chains Supported||–||19||5||19||6||–||26|
|Major Exchanges Support via API||Yes||Yes||Yes||No||Yes||Yes||Yes|
|Import Data||Yes||Yes||Yes||Yes||Yes||From given address||Yes|
|Tax-loss Harvesting Tool||No||No||No||Yes||No||No||Yes|
|LIFO & FIFO Method||No||Yes||Yes||Yes||No||Yes||Yes|
|Tax Prepared Services||Yes||Yes||Yes||Yes||Yes||Yes||Yes|
- Connect through APIs or CSV.
- Keep the records of all of your transactions.
- Give tax reports at any time.
- Export the reports in a proper format.
- Precise tracking of trades and tax.
- Easily connect with all exchanges.
- Provide full support in the US.
- It helps to track your crypto trades and analyze them.
- Provide API encryption.
- Get a report on the value of your crypto assets and gains or loss.
- Contain at least 12 methods for tax calculation.
- Import your crypto data from any exchange.
- Do tax-loss harvesting by using the Tokentax tool.
- Export report in word, excel, or any proper format.
- Connect with all the significant wallets.
- Provide capital loss deduction.
- Calculate tax of crypto assets.
- Provide FIFO and LIFO methods.
- Track trades using APIs.
- Generate major tax reports.
- Generate financial reports.
- Work with all the major exchanges.
- Provide donations and closing reports.
- Produce P&L statements to ensure tax reduction.
Final Verdict – How To Reduce Crypto Taxes Legally
In the end, we advise you to learn on how to reduce the crypto taxes legally and don’t go illegal to avoid crypto tax. If you are not paying crypto tax, you break the law because cryptocurrency transactions are a public ledger.
Make sure to reduce crypto tax legally by using a tax-loss harvesting tool, selling crypto assets, and use crypto tax software to keep track of your transactions and tax returns so you can make the right decisions on time.
I am a data analyst by profession who loves to crunch numbers at daytime and come home wondering how my passive income numbers for the day look like. I believe in being rich rather than looking rich. Follow me for Cryptocurrency, FIRE, Personal Finance, Credit Cards and Digital Nomad updates